Making Incentives Work

“For want of a nail the factory was lost!”

I’ve noticed that many firms offer incentives, especially for the sales staff. Rarely can they be defended as part of a strategy. More often than not, they are a “legacy” or have been implemented because, “it’s what everybody in this industry does. When they occur outside of sales they are often along the lines of “employee of the month.”

It reminds me of the nail factory that decided to offer a manufacturing performance incentive, rewarding their shift teams for the total amount of pounds of nails they could produce. The winning team out produced everybody, but upon closer examination, management discovered they had forgotten the Law of Unintended Consequences.

The winning team produced only the largest nails and increased their size to the tolerance limit.

The management quickly learned from their mistake and changed the incentive to the total number of nails produced. Again, this incentive naturally resulted in behavior with unintended consequences the management had not anticipated. Now, the winning team made only the smallest nails, and only one kind, producing well beyond the number the factory would need for many years. So, in the process of optimizing performance to win the contest, they hurt the factory.

I heard this and other similar stories while visiting the former Soviet Union on a trade mission for the State Department. These stories occurred in the centrally managed former Soviet Union, but the lessons are applicable anywhere!

It happens in the west just as often! Recently, I was listening to an employee of a successful, well known, software company describe a trip to an exotic foreign resort they “had” to take. It was a part of an annual incentive they’d earned. The reward included lavish gifts such as a Rolex watch, delivered as they got into their limousine after landing at the location. The resulting problems were:

1) The employees were not allowed to bring their spouses;

2) They lost valuable time from their assigned markets.

3) It was generally seen as an imposition rather than a reward. Imagine the expense the firm incurred arranging for a trip of that magnitude only to totally miss the mark!

Did the incentive promote the desired behavior?

Many incentives don’t incent at all. One example is the “employee of the month/day/year” award. These ceremonies can embarrass the recipient in front of his/her peers. Those who didn’t win feel like losers and they wonder what the winner did that they overlooked. This strategy rarely serves to inspire anybody.

My experience tells me, incentives that work have fundamentals that should not be ignored: • They should not reward people for doing things they already enjoy doing! That’s often a hard one, but if employees enjoy doing something and then get rewarded for it, it diminishes the value of the “pure” enjoyment and often results in reduced performance. Interesting!

• Incentives should have three core concepts at the heart of them: 1. They should come soon. They should not be only an annual event or some other protracted time period. The power of the incentive is often lost over a long time span and ability to control the outcome is often lessened, at least in the employee’s perception.

2. They should be gratifying. Not always large, but meaningful to the employee. Rewards/incentives at an annual sales meeting may liven up the meeting, but they won’t encourage more productive behavior.

3. They should be tied closely to a vitally needed behavior. This says they need to be strategic, measurable and clearly understood. These aren’t easy. They aren’t constructed just because it’s “what we’ve always done” or because it’s “what everybody does” or even because it’s “what we need to do to attract the best people.” They are designed and implemented carefully, against measurable behaviors that are part of a business strategy that will advance the performance of the business as well as the individual.